The market demand for a special type of wood that is essential for producing acoustic guitars is given by Q = 70,000-2000P, where Q is measured in thousands of pounds per year and P is the price of a pound of wood. Suppose that there are 1000 small producers of such wood, each with marginal cost given by MC = q +5, where q is the output of the typical firm.
(a) Assuming that each small firm acts as a price taker and that collectively they act as a “competitive fringe “(CF). Determine the (aggregate) supply curve for the CF. Calculate equilibrium output market price of wood.
(b) Now suppose a very large source of this special type of wood is discovered in California such that a firm in California that controls that resource becomes the dominant firm in the world and acts as a price leader. It sets the price in the market and produces accordingly to maximize its own profit. The “CF” continues to act as a competitive group and accepts the price set by the leader in California. The cost function of the dominant firm is given by C = 15QL +2000, where QL is output of the dominant firm. Calculate the profit maximizing output and price of the dominant firm in California. Also calculate its profit. Calculate the total output produced by the CF as well as the market output.